Bhutan: Economy

Bhutan’s Gross Domestic Product growth forecast for the financial year 2015 is revised slightly downward as industry growth was lower than expected. The economy is set to expand in the financial year 2016 as projected.

Selected economic indicators (%) 2015 2016
ADO 2015 Update ADO 2015 Update
GDP Growth 6.8 6.7 7.0 7.0
Inflation 7.0 6.6 6.8 5.9
Current Account Balance (share of GDP) -30.6 -25.6 -30.6 -24.6

Source: Asian Development Outlook 2015; Asian Development Outlook 2015 Update

Economic performance

Sales of electricity were lower than in the previous year, despite higher hydropower production. Construction of the five major hydropower stations continued, but delays caused by geological and construction difficulties have pushed back scheduled completion by some months. Growth in services accelerated, but it did not fully offset the shortfall in industry. Export sales of major industries improved somewhat, while bank lending picked up with the removal of the credit restrictions in September 2014. Tourism performed strongly, as expected, with growth in arrivals at over 30%, much higher than in the previous 2 years.

Government budget spending for financial year (FY) 2015 (ended 30 June 2015) was revised slightly upward, reflecting increases in public sector wages and benefits and greater spending on crop intensification projects that should help boost agricultural production and consumption.

Inflation trended downward during most of FY2015, as food prices fell with increased domestic supply and declining prices on food imports from India—a trend broadly in line with global food markets. Food inflation eased to single-digits after it peaked at nearly 14% in FY2014, and nonfood inflation remained mostly stable. Reductions in fuel prices and declining housing rents helped to offset price pressures from increases in domestic power tariffs and vehicle taxes. Inflation in FY2015 was slightly lower than forecast.

Economic prospects

Notwithstanding upside pressures from increased government spending and wages, inflation is expected to ease further in FY2016 as harvests improve, world and domestic food prices remain low, and regulated fuel prices are unlikely to increase.

The current account deficit is projected to be a quarter of GDP in FY2015 and FY2016, lower than projected in ADO 2015 but still high. Hydropower-related imports will slow toward the end of the government’s Eleventh Five Year Plan, FY2014–FY2018, when most of the major stations near completion. Trade other than in hydropower will benefit from low oil prices, but the deficit will continue to reflect large private imports and lackluster exports other than hydropower. Sufficient capital and financial flows from funds tied to projects will help keep the overall balance in surplus and international reserves adequate. Risks of renewed liquidity pressures would arise if recently adopted demand management policies are not maintained.

Excerpted from the Asian Development Outlook 2015 Update.